That’s the lesson from the CBI PE into ex-Sebi chief
Anyone with even a passing acquaintance with the National Spot Exchange Ltd (NSEL) case or that pertaining to MCX or even MCX-SX knows that the group’s promoters—the FTIL group headed by Jignesh Shah—were given the rough end of the stick by Sebi, at that time headed by CB Bhave and with KM Abraham as a Member. When MCX-SX was set up, the Bhave-headed Sebi gave it a provisional licence for a year, in which the promoters were told they had to reduce their equity holdings to 5%. In this period, MCX-SX was allowed to deal in only currency derivatives, not equities. When MCX-SX applied for permission to deal in equities, Sebi drew its attention to the MIMPS rules on the 5% cap on holdings of promoters—MCX and FTIL, for the record, argued MIMPS did not specify a one-year period for diluting equity; indeed, other financial regulators such as RBI allowed a much bigger window for diluting equity. Sebi, however, was unmoved and refused to allow MCX-SX to deal in equities—the most lucrative segment of the market—even after MCX and FTIL diluted their equity. In a detailed order, Sebi argued the dilution was just eyewash as the promoters still had the option to buy back the shares. MCX-SX then fought a bruising battle in the Bombay High Court that went against Sebi. Sebi appealed this in the Supreme Court which directed it to resolve the matter afresh … by this time, Bhave had retired.
The point is not whether Bhave was right in refusing to grant MCX-SX a licence to trade in the equity segment, it is not even about whether MIMPS was right in asking for equity dilution to be done in one year or more. Indeed, this newspaper has argued that the dilution rule made little sense since it was not possible for 20 persons—required, if the ceiling on individual shareholdings is 5%—to get together to set up any new business. Regulators like RBI allow larger promoter shareholdings initially and dilution is required after several years—by which time, as the business gets profitable, promoters can get a premium for their efforts. The point is that, even if something was wrong in the functioning of MCX-SX—so far, the irregularities unearthed relate only to NSEL which was an unregulated body—and this has not even been alleged so far, it is absolutely far-fetched to go back into the original licensing process. What makes it ironical, of course, is that Sebi was considered to be anti-MCX/FTIL in those days. If the CBI is going to register preliminary enquiries into each such decision years after the fact, this just reinforces the bureaucratic desire to not take decisions at all—no bureaucrat, after all, has had an enquiry against him/her for not taking a decision.